Talbots Inc posted a narrower-than-expected quarterly loss on Wednesday, signaling that the retailer's push to turn around its business through cost-cutting and better merchandising is paying off.

The company, which sells traditional clothing styles to women and is majority-owned by Japan's Aeon Co Ltd <8267.T>, is in the midst of a drive to reduce expenses by $150 million a year. It now expects to realize $135 million in cost cuts this year, up from a prior target of $125 million.

Talbots, which has been cutting staff and streamlining its operations as it tries to lure back shoppers over the age of 35, said it is encouraged by customers' response to its fall merchandise. While the company still expects sales to drop in the current third quarter, the decline should not be as steep as in the first two quarters of the year, it said.

Customers seem to be responding positively to the new product, which we agree has looked much better, said UBS analyst Roxanne Meyer. She said that the company's third-quarter guidance could be conservative.

Shares of Talbots were up 21 cents at $7.32 after rising as high as $7.80 in morning trading.

LOSS TOPS EXPECTATIONS

Talbots posted a net loss of $24.5 million, or 45 cents per share, for the second quarter ended on August 1, compared with a net loss of $25 million, or 47 cents, a year earlier.

Excluding restructuring and impairment charges, the company's loss was 33 cents per share. On that basis, analysts' average forecast was a loss of 52 cents per share, while Talbots itself had forecast a loss of 50 cents to 58 cents per share.

Sales from continuing operations fell 23 percent to $304.6 million. Sales at stores open at least a year plunged 24.9 percent.

The company said its deal with an affiliate of Li & Fung Ltd <0494.HK> is on track to be completed by mid-September. Li & Fung will become the exclusive global apparel sourcing agent for nearly all Talbots apparel, a move that should help Talbots cut costs and bring items to market faster.

Talbots competes with a host of companies selling apparel to mature women who have dramatically cut back on clothing purchases in the midst of the recession.

The company said it expects to post an adjusted loss from continuing operations of 24 cents to 30 cents per share for the third quarter. Analysts' average forecast is a loss of 31 cents per share. Talbots expects sales to fall 14 percent to 17 percent.

Earlier this summer, the company completed the sale of its underperforming J. Jill brand to Golden Gate Capital for about $75 million. It paid $517 million for the women's fashion chain just three years earlier.

(Reporting by Jessica Wohl, additional reporting by Alexandria Sage in San Francisco; editing by John Wallace, Dave Zimmerman)

Japan